Investigating the income and health effects of industrial jobs for workers in poor countries

Christopher Blattman, Stefan Dercon20 December 2016

African countries are scrambling to bring industrial firms into the continent, and workers face a choice between industrial jobs and self-employment. This column reports the results of a randomised controlled trial of 1,000 job applicants in Ethiopia, which suggests that industrial workers earned no more in a year than those given training as entrepreneurs, and had higher disability rates. Two-thirds of industrial workers chose to quit, suggesting that low wages and poor working conditions are a concern for policymakers who promote industrialisation.

A country’s path to middle-income status lies, in large part, through industrialisation. African countries are scrambling to bring industrial firms into the continent. As low-income countries industrialise, more workers will be able to choose between informal self-employment and low-skill manufacturing. What do workers trade off when they make this choice, and what are the long-run impacts? How well do we understand the relative costs and benefits of these types of work?

The conventional wisdom suggests that the benefits of self-employment are autonomy and flexibility. The costs are that self-employment is often volatile and episodic, possibly with low profitability and few opportunities for growth.

Industrial firms, on the other hand, offer the benefits of steady hours and low risk of unemployment. Some firms may pay wage high wages to attract, retain, and motivate productive employees. Even poorly-paid jobs could impart scarce skills and experience to employees so that their wages increase over time. But the costs of industrial jobs are controversial. Campaigners criticise them for low wages and poor working conditions. It is hard to predict the long-term consequences of difficult or unhealthy work. Even firms and workers may not understand all the tradeoffs.

Research has looked at opportunities to stimulate self-employment in developing countries. Studies (Udry and Anagol 2006, de Mel et al. 2008, Banerjee et al. 2015, Blattman et al. 2014, 2015) show that lifting constraints like access to capital, or providing training in how to run a business, can stimulate self-employment and improve outcomes for the poor.

We ran a randomised controlled trial in Ethiopia to discover whether industrial jobs are good or bad for poor workers, and to measure the preferences of the workers. In the last 15 years, Ethiopia’s government has encouraged entry by private firms. Before this push to industrialise, manufacturing was a small part of the economy. Now it is a growing manufacturing hub, both for domestic consumption and exports of garments, agricultural and horticultural goods to Europe. From 2000–08, national income and industrial output both grew about 10% per year, from both domestic and foreign investment (Chen et al. 2015, World Bank 2015).

With the research and policy non-profit Innovations for Poverty Action [http://www.poverty-action.org/node/6801] and the Ethiopian Development Research Institute [http://www.edri-eth.org/] we worked with five firms in four regions to randomise almost 1,000 entry-level applicants to one of three groups. The first received an industrial job offer, the second a control group, and the third took an entrepreneurship program, designed to improve their self-employment opportunities, consisting of a $300 grant and five days of business training. We followed the impacts of the job offer and entrepreneurial opportunities on our panel for a year, studying patterns of employment and health and well-being of the subjects (Blattman and Dercon, 2016).

Impacts on labour and economic outcomes

We found that the industrial jobs had little impact on incomes compared to the control group. The industrial jobs offered longer hours at a lower wage than the informal sector jobs that those in the control group found for themselves, though the difference was not statistically significant. A clear majority of workers disliked the industrial jobs, and quit, often without another job to go to. By the end of the year, only 32% of those who successfully applied for an industrial job worked in industry.

Figure 1. Earnings per hour for the three groups of workers in Ethiopia (in 2010 birr)

Source: Blattman and Dercon, 2016

Meanwhile those in the entrepreneurship group worked significantly longer hours than those in the control group. They earned about a third more (12 birr, or $3.40 PPP) per week than the control group, primarily from business income, which is a meaningful amount for people in these economic circumstances. There was no significant difference in non-durable consumption between the industrial job and control groups, but the entrepreneurship group consumed significantly more.

Health risks

Industrial jobs also had increased health risks. The disability rate rose 3.3 percentage points among those offered an industrial job, nearly doubling the risk of injury. An index of health measures suggests industrial job recipients suffered a (statistically significant) 0.19 standard deviation decline in health. In qualitative interviews, the workers reported exposure to chemical fumes and repetitive stress injuries. The probability of a serious health problem rose one percentage point for every month of industrial work. Those in the entrepreneurship group also had a slight increase in risk of disability, but were not significantly different from either the industrial or control groups.

Worker preferences

Workers themselves seem to have preferred entrepreneurship—the entrepreneurs were less likely to have taken an industrial job by the end of the year (9% compared to 20% in the comparison group). Many workers used industrial jobs as a safety net when other work was not available, but would quit when there was another opportunity. The few who remained in industrial jobs were older, had less work experience and scored lower on cognitive ability and conscientiousness. They expected to have fewer alternatives.

This experiment was not set up to compare competing paths to development (however much the entrepreneurship program resembles common NGO and government anti-poverty programs). Rather the point of the work was to help policymakers better understand the trade-offs that workers face when choosing an opportunity. It may help policymakers judge how helpful job offers would be.

This surprising result is important for policymakers to consider when considering policies to promote development. Given the assumption of industrialisation as an important step in development, we would caution against overgeneralisation. The data does not suggest that industrial jobs are bad for workers, just that workers prefer alternatives when the jobs are poorly paid or have a risk of injury. The high quit rate is also important to employers, because high turnover is a cost to firms that offer poor pay and hazardous conditions.

Ethiopia is in the early stages of what may become an industrial boom. For example, in Hawassa, US apparel manufacturer PvH (with brands such as Calvin Klein and Tommy Hilfiger) has just opened an industrial park that will employ up to 60,000 workers in three years. If PvH wishes to make its workers better off, our findings suggest it needs to pay close attention to how these jobs are set up.

Blattman, C., J. Annan, E. P. Green, C. Lehmann, and J. Jamison (2015). The returns to microenterprise development among the ultra-poor: A field experiment in post-war Uganda. forthcoming in American Economic Journal: Applied Economics.